Sole Trader - Tax Year?
Discussion
Hi
Its a long time since I've been a sole trader, having been involved in several Ltd companies in the last 12 years. However my wife is about to start as self employed, part time work expected income well below the VAT threshold.
1) Under the current self-assesment rules do we effectively have to make up accounts to each tax year end, or can we set any year end date (in which case how is income treated for personal tax reasons?)
2) Do capital allowances still exist, or what is the position in claiming back equipment bought to execute here trade. Is is treated as an expense (ie claimed against income when purchased) or can it be depreciated over a few years?
Obviously I can talk to my account, but its the weekend and I just wondered if any of the PH business community know the answers.
Thanks in advance
davidy
Its a long time since I've been a sole trader, having been involved in several Ltd companies in the last 12 years. However my wife is about to start as self employed, part time work expected income well below the VAT threshold.
1) Under the current self-assesment rules do we effectively have to make up accounts to each tax year end, or can we set any year end date (in which case how is income treated for personal tax reasons?)
2) Do capital allowances still exist, or what is the position in claiming back equipment bought to execute here trade. Is is treated as an expense (ie claimed against income when purchased) or can it be depreciated over a few years?
Obviously I can talk to my account, but its the weekend and I just wondered if any of the PH business community know the answers.
Thanks in advance
davidy
Hi Davidy,
1. You don't HAVE to make up accounts prepared by an accountant- you just have to return accounts on your annual tax return. If you are turning over less than about £15grand then you only have to put in very very abbreviated accounts- you just put in gross income and gross costs- otherwise you need to be able to do a proper brakedown. As you are a sole trader you need to prepare accounts so that they are presented to the 31st Jan each year- ie 8 months after then end of the tax year. I don't "think" that you can change this date, although Eric will konw better than me- i know you can have your first tax year longer than twelve months! You are taxed on your profit NOT on your income, and as with companies you can bring losses forward to post them backwards.
2. You can still claim capital allowances, or you can set them against income- although i think you have to be a little careful here deciding what is in your balance sheet and what is in your P&L- tax man doens't like certain things in certain places!
don't fall into the trap of not getting an accountant to prepare accounts- i did this the first year i got into business proper and it caused all sorts of hassles when i had a review, and when i wanted to raise money!
hope this helps.
1. You don't HAVE to make up accounts prepared by an accountant- you just have to return accounts on your annual tax return. If you are turning over less than about £15grand then you only have to put in very very abbreviated accounts- you just put in gross income and gross costs- otherwise you need to be able to do a proper brakedown. As you are a sole trader you need to prepare accounts so that they are presented to the 31st Jan each year- ie 8 months after then end of the tax year. I don't "think" that you can change this date, although Eric will konw better than me- i know you can have your first tax year longer than twelve months! You are taxed on your profit NOT on your income, and as with companies you can bring losses forward to post them backwards.
2. You can still claim capital allowances, or you can set them against income- although i think you have to be a little careful here deciding what is in your balance sheet and what is in your P&L- tax man doens't like certain things in certain places!
don't fall into the trap of not getting an accountant to prepare accounts- i did this the first year i got into business proper and it caused all sorts of hassles when i had a review, and when i wanted to raise money!
hope this helps.
pugwash4x4
Thanks, I was going to pepare the accounts myself, but just ask my accountant on the salient points. I am fully aware about being taxed on profit and have run several ltd companies so can sort a balance sheet v P&L out.
My biggest concern is the fact that if capital equipment is treated as an expense, then if the first year is 'short', then we loose some tax advantages as it is possible that then the profit in this short year will be well short of my wife's personal allowance, and therefore not making efficient use of it.
Hopefully EricMC will clarify the situation.
davidy
Thanks, I was going to pepare the accounts myself, but just ask my accountant on the salient points. I am fully aware about being taxed on profit and have run several ltd companies so can sort a balance sheet v P&L out.
My biggest concern is the fact that if capital equipment is treated as an expense, then if the first year is 'short', then we loose some tax advantages as it is possible that then the profit in this short year will be well short of my wife's personal allowance, and therefore not making efficient use of it.
Hopefully EricMC will clarify the situation.
davidy
You can have a accounting period end different to the 31 March if you like, but I wouldn't recommend it because you will end up paying tax on the same profit twice, which can only be reclaimed when you cease trading.
Hence regardless of when you start trading your first accounting period should end on the 31 March.
Also as a small self employed business, don't bother with a balance sheet, just keep adequate records of business income & expenditure.
Hence regardless of when you start trading your first accounting period should end on the 31 March.
Also as a small self employed business, don't bother with a balance sheet, just keep adequate records of business income & expenditure.
Hi folks - been away.
It is still a requirement that sole traders prepare accounts information and submit this information to the Revenue for each tax year.
Since Self Assessment came in, the Revenue have not required that separate typed accounts be prepared. Self Assessment tax forms have separate "Self Employed Income" supplementary pages which have a pro-forma set of boxes covering the various income and expenditure headings and balance sheet headings normally found in a sole trader business. Most accountants will go ahead and complete the normal typed accounts and transfer the relevant data into the relevant boxes when the tax return is being completed.
The problem with the standard headings used in the Self Assessment tax return is that they are rather generic and may not be sufficiently detailed to allow the tax inspector to understand all the details that should be shown in the accounts. I always submit the formal typed accounts alongside the completed and approved tax return.
Many small businesses dispense with balance sheets. This is not formally approved by the Revenue but I have never ever had the Revenue reject a set of accounts because of a lack of a balance sheet. The only time when a balance sheet can legally be dispensed with is when the business turnover is under £15,000 per annum - as in those circumstances the simple "Three Line Accounts" can be submitted in lieu of detailed accounts. Please remember that even if Three Line Accounts are being submitted, the Revenue expect that a full set of accounts should be available for inspection if necessary.
Regarding year end dates, self employed individuals are totally free to chose whatever year end they think is appropriate for their business. However, the tax return year still runs from 6 April to the following 5 April. The accounts entered on any given tax return are the accounts for the year ended IN the actual tax year. For example, if your year ended on 31 May 2006, then the accounts for that year would be entered on the 2006/07 tax return. The accounts for the year ended 31 May 2007 would be entered on the 20087/08 tax return... and so on.
This is fine except that in the first year of Self Assessment the first trading year or at least a part of it will end up being taxed twice. Most accountants generally advise their sole traders that the simplest year end to select is a year end virtually matching the tax year. The most logical calender year ending is therefore 31 March. This ensure that the problem of double taxation in the first year is eliminated.
It is still a requirement that sole traders prepare accounts information and submit this information to the Revenue for each tax year.
Since Self Assessment came in, the Revenue have not required that separate typed accounts be prepared. Self Assessment tax forms have separate "Self Employed Income" supplementary pages which have a pro-forma set of boxes covering the various income and expenditure headings and balance sheet headings normally found in a sole trader business. Most accountants will go ahead and complete the normal typed accounts and transfer the relevant data into the relevant boxes when the tax return is being completed.
The problem with the standard headings used in the Self Assessment tax return is that they are rather generic and may not be sufficiently detailed to allow the tax inspector to understand all the details that should be shown in the accounts. I always submit the formal typed accounts alongside the completed and approved tax return.
Many small businesses dispense with balance sheets. This is not formally approved by the Revenue but I have never ever had the Revenue reject a set of accounts because of a lack of a balance sheet. The only time when a balance sheet can legally be dispensed with is when the business turnover is under £15,000 per annum - as in those circumstances the simple "Three Line Accounts" can be submitted in lieu of detailed accounts. Please remember that even if Three Line Accounts are being submitted, the Revenue expect that a full set of accounts should be available for inspection if necessary.
Regarding year end dates, self employed individuals are totally free to chose whatever year end they think is appropriate for their business. However, the tax return year still runs from 6 April to the following 5 April. The accounts entered on any given tax return are the accounts for the year ended IN the actual tax year. For example, if your year ended on 31 May 2006, then the accounts for that year would be entered on the 2006/07 tax return. The accounts for the year ended 31 May 2007 would be entered on the 20087/08 tax return... and so on.
This is fine except that in the first year of Self Assessment the first trading year or at least a part of it will end up being taxed twice. Most accountants generally advise their sole traders that the simplest year end to select is a year end virtually matching the tax year. The most logical calender year ending is therefore 31 March. This ensure that the problem of double taxation in the first year is eliminated.
Eric
Thanks for your detailed response.
Expected T/O is only in the region of 15K per year (about £12K profit/income), so I will prepare a simplified Balance Sheet and P&L and attach these to my wife's tax return, filling in the appropriate boxes on her return.
To make things simple I'll keep the year end to 31/3 and capitialise her equipment (required to carry on the trade) and depreciate it accordingly.
Regards
davidy
Thanks for your detailed response.
Expected T/O is only in the region of 15K per year (about £12K profit/income), so I will prepare a simplified Balance Sheet and P&L and attach these to my wife's tax return, filling in the appropriate boxes on her return.
To make things simple I'll keep the year end to 31/3 and capitialise her equipment (required to carry on the trade) and depreciate it accordingly.
Regards
davidy
Some points to be aware of - the £15,000 turnover threshold for Three Line Accounts is an "annualised" figure. If she achieves sales of £12,000 (say) in her first accounting period but the accounting persiod is (say) 9 months long, this would equate to £16,000 per annum and would mean that a full set of accounts would need to be prepared. I would still be prepared to exclude the Balance Sheet until turnover becomes more sizeable. I generally use the VAT turnover threshold (currently £61,000) as the point where I will start including balance sheets.
Regarding what needs capitalising, the basic priniples still apply - essentially Fixed Assets and related installation costs would count as Capital items. Make sure you are aware of the carious rules and regulations relating to CAs i.e the different rules regarding motor cars compared to commercial vehicles, what assets attract first year allowances, the treatment of leases and HP etc.
Regarding what needs capitalising, the basic priniples still apply - essentially Fixed Assets and related installation costs would count as Capital items. Make sure you are aware of the carious rules and regulations relating to CAs i.e the different rules regarding motor cars compared to commercial vehicles, what assets attract first year allowances, the treatment of leases and HP etc.
Gassing Station | Business | Top of Page | What's New | My Stuff